In Real Estate, It’s Location, Location, Something Else

August 07, 2009 By: Sekou Murphy Category: Business

Location, location, location.

Who hasn’t heard that saying.

As my wife and I are beginning our search, anew, for rental property, it occurred to me that this is not correct.

It’s value, value, value.

While it includes location, it’s not the only thing. Think about it…if you buy a rental property in the BEST location in the city, but overpay, you’ll never see a cash profit.

We’ve done very well as far as tenant acquisition, property management and tenant disposition. Our turnover has been remarkably low and no one has missed a payment in 8 years. Unheard of.

This is totally because tenants feel that they are receiving value (and careful screening on our part, of course), given their needs (this is a critical concept). They get a property in a good location, that’s well kept and have landlords who act reasonably fast in dealing with issues. We hope to implement some more ideas that’ll make it easier for tenants to rent from us as soon as we have more scale.

But we also make sure we “run” the numbers to ensure cash flow profit. This includes doing our own operating cost estimates (independent of the previous landlord’s estimates) and factoring in our own mortgage payments. My wife says that you make your money when you buy a property, not when you sell it. I think she’s right.

So value is apparent in every phase of real estate and it’s not all about location.

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Robert

It's refreshing to hear someone say what few in the real estate industry want to admit. Your wife is right-in real estate you make money on the buy. Location is important only so far as you have a clear understanding of market and your strategy for the property. It's all about cash flow. Appreciation is just the sprinkles on the ice cream. I also applaud your philosophy on being a landlord. Having been a landlord for many years I concur that good tenants are worth their weight in gold. Way too many landlords have no conception of the cost of turnover. I always price my properties ever so slightly on the low side of the market and also screen heavily for good tenants that are likely to stay for a long time. Squeezing a few extra dollars out of rents or being cheap on maintenance will never make up for the cost of high tenant turnover.

Sekou (Koe) Murphy

Hi Robert,

I agree 100% w/ everything, especially about not trying to squeeze a few extra dollars in rent, especially with good tenants - most good tenants have options and aren't afraid to move (although they might not want to). Doing a little more homework on the front (in most things) will save you more time in the back. I usually have buyer's remorse, but it goes away :)

Sekou (Koe) Murphy

Hi Deborah,

For potential tenants, we screen in and as much as we screen OUT. We ask whether they're familiar with the area (and am clear that it's not for everyone), whether they've gotten the chance to review the rental qualifications, etc. (we still do a sales pitch, but I think people trust us more when we tell them some of the flaws too). This allows for a much more beneficial walk-through. During the walk-throughs, we're honest about the house, the area, and how we are as landlords (everything starts with a great property, which is a given). After we get applications, we due hard due diligence - credit checks, calls to previous landlords, and income verification. During the tenancy, we respond as quickly as possible to ALL issues (major and minor) and are flexible with rent increases (particularly with good tenants). These efforts ensure that tenants feel like they're getting value for their rent. Once I have good tenants, we want to keep them (it's generally much cheaper).

Deborah

I'm more curious about how you got such good tenants. What due diligence did you do on the tenants and how. What background checks do you run?

Sekou (Koe) Murphy

Mark, I think you're right and wrong. Location is critical, but times than not, the person selling the property knows that, so they build that into the price. If the numbers work, with you still paying a hefty premium, then more power to you. But I'd look at a not-as-desirable location as well. If you can make a better killing, then why not go there?

Mark Bates

Chances are, you can make something out of property in a good location, than one in a horrible one. If I had to bet, I'd bet on location as the primary factor.

Shane

Warren Buffet said price is what you pay, value is what you get!

Sekou (Koe) Murphy

Shane, I agree 100%. It makes total sense. If you don't get anything w/ value, then you don't have anything at all.

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In Real Estate, It’s Location, Location, Something Else

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